FTSE gains on miners

FTSE gains on miners
by Ipek Ozkardeskaya

The European markets opened flat with a sense of caution. The UK miners pulled the FTSE up higher in London. Glencore (4.5%), Anglo American (3.7%) and Antofagasta (3%) lead gains as copper futures are better bid on potential Chinese intervention to halt the slide in metal prices. China is now starting an investigation against malicious metal short-selling, while nickel producers will meet to discuss a potential cut in production; in reaction to falling demand. On the contrary, copper producers are looking to increase their output, hoping that more cost efficient mines could be profitable even if the copper stabilises at about $2/lb. With the lack of a pick-up in demand, the latter strategy may prove to be harmful for the future revenue margins, especially for highly-indebted companies, such as Glencore. In this context, the recovery in the miners is brittle. Investors should keep in mind the possibility of a squeeze in copper prices and a renewed sell-off could again hit mining stocks.

BHP is down at the open as the UN investigates the disaster in Samarco, Brazil. The UN says that the companies (with Vale) have not done enough to prevent the disaster.

This being said, the wider picture remains broadly negative and a setback to $2/lb could well be around the corner not only on demand-supply concerns but on the heel of the strengthening US dollar, which expected to weigh on the entire commodity complex.

Rio Tinto estimated ‘two more years of pain’ in the copper market, while adding that copper should recover faster, ‘in two or three years, we can see the light at the end of the tunnel as far as copper is concerned.’

Substantial speculation on the Eurozone sovereigns

Every single word that comes out of an ECB official rapidly translates into a further rush in the Eurozone’s sovereign debt market and to a weaker euro. The Italian, Spanish and German two-year bonds trade on negative rates.

The Eurozone sovereign bond market is like a blowing balloon. The risk-return ratio is well shattered. The Eurozone bond purchases have become speculative investment tool; investors look to benefit from a bond price increase as the ECB prepares to expand its bond purchases program (QE). The increasing bond prices carry the risk of a potential unwind at any time.

The Euro sinks to fresh 7-year low against the US dollar. Trend and momentum indicators remain flat-to-negative, the upside corrections are seen as opportunity to sell and hence are expected to remain capped at 1.0700/1.0750. All eyes are on the ECB’s Dec 3rd meeting. The ECB is expected to expand its QE program and could also lower its deposit rate to further negative. The broad picture remains comfortably negative and the mid-term direction remains bearish with unchanged target at 1.0500/1.0450 zone.

Australian capex slumps, RBA alert

The Australian capex spending fell by a record 9.2% in Q3, much faster than 2.9% drop the market was anticipating. Last quarter’s fall has also been revised lower to -4.4% from -4.0%. The Aussie is the biggest loser against the US dollar so far. The very weak data is expected to keep the RBA alert for a possible further cut on its cash rate. RBA’s Kent had stated last week that ‘if commodity prices continued to weaken, AUD would need to fall further to help rebalance the economy.’

The Aussie has gained 6.6% since September as investors looked to park their cash in relatively high yielding AUD-denominated assets. As the ECB prepares for additional stimulus via larger asset purchases and further negative rates, the RBA is left with little option. The only efficient action to the carry inflows is lowering its own cash rate. A lower rate differential could curb the appetite for those chasing to benefit from the rate differential and keep the Aussie within 1.45/1.50 zone against the euro and within the 65/70 cents range against the US dollar.

Thanksgiving holiday in the US

In the US, the durable goods orders probably surged 3.0% in October (vs1.7% exp. & -1.2% last) according to the preliminary data; capital goods orders nondefense (ex-aircraft & parts) rose 1.3%m/m. The US dollar index stepped above the 100 handle as Fed hawks dominate the game. There is nothing to derail the Fed from taking the first step in December; the market gives a 72% chance for the latter.

At the US is celebrating Thanksgiving, the US session will be quiet.